John Collins has a unique perspective on the start-up scene – both in Ireland and internationally.
A former technology and business writer with The Irish Times, he went on to become director of content at Intercom, joining the Irish tech darling long before it reached unicorn status.
In the latter role, he was charged with setting and implementing Intercom’s content strategy from the top of the funnel (think blogs and podcasts) right through to conversion (gated content, sales enablement etc).
He now works as an independent consultant and advisor for technology companies. And he is bringing all that real-world experience to The Currency in a new series of articles on the technology industry in Ireland.
His first piece appeared on the site last week and explored what the current tech slide means for Irish start-up funding.
John brought his own unique analysis, but he also canvassed the views of a range of founders, financiers, venture capitalists and industry experts.
The message from all was clear: regardless of how the current tech slide plays out over the rest of the year, there are legitimate questions to be asked about what the impact is likely to be on funding for Irish innovation.
Here are five key takeaways from John’s first piece.
1. Capital constraints
2021 was an extraordinary year for fundraising in Ireland. According to figures from the Irish Venture Capital Association (IVCA), investment in Irish companies reached a record €1.3 billion in 2021, up 44 per cent from €925 million the previous year.
Even without the global tech slide and the wider economic uncertainty, it was always unlikely that this year could match the 2021 peak. This is borne out by figures from TechIreland, which show that funding in H1 2022, at €755 million, fell by almost 20 per cent compared to H1 2021.
The 2022 figures were actually up on 2020 levels, but in an accompanying piece, the entrepreneur and investor Brian Caulfield explained how just three companies, Wayflyer, Flipdish and TransferMate, raised 40 per cent of the total between them. “Investment rounds in the mid-range of €1-10 million were relatively stable but seed and pre-seed investments fell dramatically,” he wrote.
As John reported, the IVCA has raised particular concerns about the amount of overseas capital that goes into Irish start-ups and how that money can easily retreat in tough times. “In 2021, 56 per cent of the funding for scaling businesses here came from overseas, but that’s the first money that’s going to dry up in a recession,” says Sarah Jane Larkin, director general of the IVCA.
2. Falling angels
Ireland has an underdeveloped network of angel investors willing to write cheques. Examining angel investment as a percentage of GDP, the European representative body for early-stage investors said Ireland was resolutely mid-table compared to our European peers, even lagging behind Malta, Turkey and Austria.
Patrick Walsh, CEO of start-up incubator Dogpatch Labs, told John that angel investing is “one of the most underperforming parts of the ecosystem”.
In the US, angels are generally successful tech workers who write cheques for as little as $1,000. The average in Ireland is €44,000, although many people participate at around the €25,000 market.
“If you assume that you need 10 private investments to diversify your portfolio, we are talking about individuals who have €250,000 to invest. That’s why the profile of angels in Ireland versus San Francisco is very different,” Walsh told John.
As John explained, a multi-million euro Series A or B round was previously expected to fund a company for 12-24 months until they reached certain growth milestones and raised again. However, that is no longer the case. “Start-ups instead are having to look to stretch their funding for at least another two years,” John wrote.
As Colm Long, chief revenue officer with Tines, put it, “everyone is looking at burn rate now”.
Tines was valued at $300 million when it raised $26 million from international investors in April 2021. Long is very confident that revenues will support that valuation, but says it would be very different if they had accepted a higher valuation: “If we were trying to justify a $1 billion valuation, a lot of decisions would be taken out of our hands,” he told John.
According to Brian Caulfield: “Series B, C and later private companies are going to be hit hardest – particularly the companies that focussed on growth at all costs and raised lots of capital at very high valuations. They are going to have to either cut their burn rate significantly to buy time to grow into their previous valuation or consider doing a down round.”
4. Down rounds
A down round is where a private company offers additional shares for sale at a lower price than had been sold for in the previous financing round. And as John wrote last week, they are highly problematic.
“It also makes it harder to retain employees, a significant portion of whose compensation comes in the form of stock options, which will be below water after a down round. Although this can be solved by creating a new option pool for employees, it’s an additional legal and financial overhead to have to deal with.” he said.
Bobby Healy, the co-founder of Manna, the drone delivery start-up, said that Series A and B stage companies don’t have the option to restructure. “If they are not generating revenue they are at risk of running out of cash. But they don’t have a balance sheet to support debt as they have no revenue to talk of. I think there are going to be a lot of failures and down rounds in Ireland as a result,” Healy warned.
5. A positive state
While the international mood music around technology is depressing, a number of the people that John spoke to highlighted the important role of the Irish state in the Irish start-up ecosystem, something they believe will help the industry over the coming year. Caulfield said that the available State and EU supports for Irish innovation, including Enterprise Ireland, made him “reasonably positive” about the continued availability of funding for early-stage companies.
In addition, most believe that the government’s €90 million Irish Innovation Seed Fund (IISF) programme, which was initially intended as a Covid support and will invest in other venture capital funds, will provide a boost for early-stage funding.
As John put it: “Although opinions vary on the benefit of the State being such a large start-up investor, almost everyone interviewed for this article cited its ‘counter-cyclical’ nature – pumping new funds into the ecosystem at a time when international markets are closing – as a huge positive.”
John will continue his series over the coming weeks.
Elsewhere last week, we published an investigation by Joe Galvin into the Irish operations of the Predator spyware vendor Intellexa. One of the world’s most controversial private spying companies, it is now the target of a criminal investigation in Greece and a European parliamentary inquiry. Joe revealed how it is headquartered in Ireland where it mirrors the tax structures used by tech multinationals.
Jim Bergin is CEO of Tirlán co-op, which has now separated its Irish business from Glanbia. In his first interview at Tirlán’s new head office, he told Thomas how the company intends to make use of its new-found independence.
Sinead looked at Marc Andreessen’s mega investment in Adam Neumann’s start-up Flow, describing it as the “most hilarious venture capital deal of the century”. As Sinead put it: “Do I think Neumann is sleazy and destroys value at any given opportunity? Yup. Do I think Flow is potentially a great deal for Andreessen Horowitz? Also, yes. The discrepancy between my feelings for both of these questions boils down to the changing nature of venture capital dynamics.”
Uniphar last week bought The McCauley Pharmacy Group from CCI, a private equity fund backed by Cardinal Capital and Carlyle. Sean examined who were the winners and losers of the deal.
Limbo, a weight-loss start-up co-founded by Pat Phelan, has raised a €6 million seed round. Basketball legend Shaquille O’Neal is on board, along with a host of successful Irish tech investors. But what actually is the technology that is promising so much? To answer that question, Rosanna talked to its CEO Rurik Bradbury.
Also, just a small note of thanks to all our members. Today marks the third birthday of The Currency. We continue to grow, and we continue to invest in journalism. And we could not do this without your support.